On Grin, MimbleWimble, and Monetary Policy

Grin is a new privacy and scalability-focused cryptocurrency that is likely to debut in early 2019. There are several properties unique to Grin that make the project interesting. For example, Grin utilizes a privacy-preserving blockchain format called MimbleWimble, meaning the tokens will be fungible and users will have strong anonymity guarantees. Additionally, Grin is uniquely scalable, since Mimblewimble stores only a small amount of data in the blockchain. This means that it will be cheap and easy to run a full node, and new nodes will be able to sync up with the network quickly and efficiently. Mimblewimble was introduced by an anonymous founder, and much of the current Grin development team is anonymous and distributed. It will have a fair proof-of-work launch with no premine. Further, its Cuckoo Cycle PoW algorithm is designed to be more egalitarian and centralization-resistant than other alternatives, at least in the near term.

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Grin is one of the few projects that aims to be a true currency and has some of the features that make Bitcoin so interesting-- anonymous founder, leaderless development group, PoW consensus, no on-chain governance, no premine. But perhaps the most interesting thing about Grin is its monetary policy.

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Monetary policy in cryptocurrencies has been a big area of discussion lately, especially regarding the differences between Bitcoin’s and that of Ethereum. Bitcoin’s fixed supply is tailored to make Bitcoin appealing as a store of value, but it also means that miners will eventually have to be incentivized by transaction fees alone. And that creates a lot of uncertainty for Bitcoin’s future-- there is no existing proof-of-concept for a blockchain that incentivizes miners using just a fee market. Continued improvement of layer-two and layer-three solutions like Lightning Network could mean even less on-chain activity for miners to process.

Ethereum’s monetary policy, on the other hand, is still being determined. This creates uncertainty for investors and those using Ethereum as a store of value, but it also allows for more flexibility in the future, something Ethereum supporters point to as an advantage. Given the uncertainty around the Bitcoin model, Ethereum’s development team does not yet know the ideal monetary policy for a cryptocurrency and can try to figure that out in time. Critics point to this uncertainty as a major reason why Ethereum will never achieve store-of-value status.

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Grin is taking a different approach from both of these projects. Grin has a linear supply schedule, meaning that inflation as a percentage of existing supply is very high early on but gradually lowers over time, approaching zero percent but never actually reaching that. Its overall supply is unlimited, with a tail emission that will continue in perpetuity. This makes it less of a digital gold competitor and more of an attempt at being an actual currency. Its monetary policy, scalability, and privacy features make it more like digital cash than digital gold.

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Grin's high early inflation will mean that the stock-to-flow ratio starts out extremely low, incentivizing spending rather than HODLing. This encourages use as a medium of exchange, which can create network effects and also increase churn, potentially creating a wider wealth distribution. It also discourages speculation. Early Grin holders will be diluted significantly, so it’s more rational to spend Grin than to save it. Early on, Grin’s utility value will be in using it, rather than just accumulating it.

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While the emission rate stays constant, the percentage of the existing supply that is issued to miners slowly goes down. This means that the stock-to-flow ratio increases over time, eventually resulting in a low inflation coin that has properties better suited to be a store of value. But this doesn’t happen for many years. In fact, Grin’s inflation rate doesn’t fall below 10% until after a full decade, and then it slowly continues decreasing from there.

Grin’s supply is uncapped, meaning there will always be inflation. This is a much different approach from the one Bitcoin is taking, but it may help Grin avoid one of the biggest potential challenges Bitcoin faces. Grin’s tail emission will help incentivize miners in the long run and reduce transaction fees on the main chain. From a store of value perspective, perpetual inflation is not ideal. But it’s highly likely that the rate of coins lost will eventually exceed new issuance. Low, perpetual inflation may solve the problem of miner incentives while not resulting in any token holder dilution at all.

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There's often a dichotomy in the crypto world between those in favor of fixed supply and those in favor of inflation. Fixed supply currencies like Bitcoin and Zcash are optimized to be stores of value, while inflationary coins are more suited to be mediums of exchange. Grin is an experiment that will attempt to optimize for one model early on and transition into another over time while retaining a monetary policy that is fixed from the beginning.

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Bitcoin is already the most secure, decentralized, and proven candidate for digital sound money. If Grin were to debut with an identical monetary policy, it would ultimately be a Bitcoin competitor and would have a tough time winning. I find it unlikely that Grin beats Bitcoin as a store of value in the long-term, but it could prove useful and educational in the medium-term. Further, Bitcoin is not without its faults, and Grin is testing a radically different set of assumptions. It's one of the few real experiments in the space that’ll be exciting to watch play out.

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